Reserve Bank of India (RBI) has hiked the amount it absorbs from banks through the 14-day variable reverse repo (VRRR) auction as it moves to re-establish the VRRR as the main tool in liquidity management.
In a post monetary policy announcement, governor Shaktikanta Das said the central bank will hike the amount it absorbs through VRRR in two auctions to Rs 6.5 lakh crore on December 17 and further to Rs 7.5 lakh crore on December 31, up from the Rs 6 lakh crore, it took from banks on December 3.
Das said that from January 2022 onwards, liquidity absorption will be undertaken mainly through the auction route even as he reiterated RBI's commitment "to rebalance liquidity conditions in a non-disruptive manner while maintaining adequate liquidity to meet the needs of the productive sectors of the economy."
RBI's rebalancing of liquidity management started in February 2020, as the central bank shifted its liquidity absorption tool out of the fixed-rate overnight reverse repo window into VRRR auctions of longer maturity.
"The objective is to re-establish the 14-day VRRR auction as the main liquidity management operation. By and large, the rebalancing of liquidity has proceeded in a timely and non-disruptive manner as planned. It is also fulfilling its objective of strengthening the Reserve Bank’s control over the liquidity overhang which, in turn, reinforces the ability of the Reserve Bank to normalise liquidity conditions when warranted," Das said.
Going forward, the 14-day VRRRs will be complemented by longer-term VRRRs of 28 days, the size and maturities of which will be decided on the basis of continuous assessment of the evolving liquidity conditions. The RBI has also reserved its rights to undertake operation twist (OT), buying long-dated bonds while simultaneously selling shorter tenure bonds or buying or selling bonds under open market operations (OMOs) to infuse or absorb liquidity as needed.
Source: Economic times
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